CFA Institute

Long-Term Comparison of Prices UnreliableAuthor(s): Ben LansdaleSource: Financial Analysts Journal, Vol. 31, No. 2 (Mar. - Apr., 1975), p. 8Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4477795 .

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toIte Editor

Long-Term Comparison of Prices Unreliable

Contrary to popular belief, inflation is not a modern phenomenon, some- thing that has broken out only in the past few years. Rather, the present eruption seems to have its roots in the 1930's and the trend of generally rising prices began long before that.

When consumer prices are chart- ed, it will be seen that during the 19th century they were falling, bro- ken only by the cataclysms of the War of 1812 and the Civil War, and by several lesser disturbances such as the Land Boom of the 1830's and the Great Expansion of the 1850's. In the 20th century, prices shifted to an upward trend, pushed even higher at times by World War I and by the series of wars extending from 1941 almost to the present. The estimated secular trend (broken line on chart) shows a rate of inflation of about 1.3

per cent in 1920, climbing to 3.3 per cent in 1960, and, when extended, indicating about 5.5 per cent in 1980.

The cost of living means different things to different people at different times. The Vermont farmer of the early 1800's, for instance, undoubt- edly spent his few hard money dol- lars quite differently from the city dweller of today. Likewise, the measure of spending, the consumer price index, is computed somewhat differently from one decade to the next. All of this makes long-term comparison of prices a rather haz- ardous and unreliable undertaking. Nevertheless there does seem to be a tide in the cost of living and right now we are well into the flood stage of this tide.

-Ben Lansdale 2275 Potter Street

Eugene, Oregon 97405

"The Short Interest Ratio..." A Critique

In the November/December 1974 Financial Analysts Journal, Thom- as Kerrigan ("The Short Interest Ratio and Its Component Parts") in- dicates that the short interest ratio was useful to investors as a tool for predicting stock market direction during the years covered in his arti- cle. If this is so, unless these years are unique in that respect, many eminent men who have made serious studies of the stock market in col- leges and universities are incorrect in their assertions that no publicly available stock data has been of value as an instrument for consis- tently achieving higher returns for a portfolio of stocks over long periods than the returns that would have been obtained from a buy-and-hold portfolio when both portfolios are of equivalent beta. Further testing is

500

400

300 COST OF LIVING INDEX 1800-1974 Estimated by splicing the following series: 1800-1851 Prices Paid by Vermont Farmers for

200 Family Living 1851-1890 Consumer Price Index by Ethel Hoover / 1890-1912 Cost of Living Index by Albert Rees 1912-1974 Consumer Price Index by U.S. Bureau of 5.5%

Labor Statistics 100

80

/ 60 3.3%

20

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

8 O FINANCIAL ANALYSTS JOURNAL / MARCH-APRIL 1975

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